Lu Do v. Central Bank
REITERATIONFacts
The Antecedents: Lu Do and Lu Ym Corporation, operating as Philippine Corn Products, Inc., was certified as a new and necessary industry under Republic Act No. 35, effective October 1, 1952. Between January 1954 and March 1955, the corporation imported 212 bales of empty cotton bags for its manufacturing operations. The Central Bank of the Philippines imposed a 17% excise tax on foreign exchange, and the Bureau of Customs, on behalf of the Collector of Internal Revenue, collected a 7% sales or compensating tax on these importations. Procedural History: The corporation demanded refunds for both taxes, which were denied. Subsequently, it filed a petition with the Court of Tax Appeals (CTA) for the refund of the 7% compensating tax, arguing the imported bags were necessary for its industry and thus tax-exempt under Republic Act 35, as amended by Republic Act 901. The CTA ruled in favor of the corporation, ordering the refund, and held that the Secretary of Finance could not limit the tax-exempt articles. Separately, the corporation filed an action in the Court of First Instance (CFI) of Manila for the refund of the 17% excise tax on foreign exchange. The CFI dismissed this complaint, sustaining the Central Bank's argument that the imported bags were not among the allowed tax-free importations and that the suit should have been filed against the Auditor General or Treasurer of the Philippines. The Petition: Both cases were jointly submitted to the Supreme Court for resolution, involving the interpretation of Republic Act No. 35, as amended by Republic Act No. 901, concerning the taxability of the imported empty cotton bags.
Issue(s)
Whether the imported empty cotton bags are exempt from the 7% compensating tax and the 17% excise tax on foreign exchange under Republic Act No. 35, as amended by Republic Act No. 901. Whether the Secretary of Finance has the authority under Republic Act No. 901 to limit the scope of tax exemption to specific raw materials. Whether empty cotton bags can be considered 'equipment' under the tax exemption granted. Whether the Court of Tax Appeals has jurisdiction to review the action of the Secretary of Finance regarding tax exemption certificates. Whether the claim for refund of the compensating tax was filed within the prescriptive period.
Ruling
The Supreme Court affirmed the order of the Court of First Instance in G.R. No. L-13033, dismissing the complaint for refund of the 17% excise tax. The Court reversed the decision of the Court of Tax Appeals in G.R. No. L-13701, insofar as it ordered the refund of the 7% compensating tax paid by the Philippine Corn Products, Inc. The Court upheld the CTA's findings on jurisdiction and prescription.
Ratio Decidendi
On the taxability of imported empty cotton bags: The Court held that the importations of empty cotton bags were not covered by the tax exemption granted to Lu Do and Lu Ym Corporation. The letter of the Secretary of Finance explicitly approved the tax exemption in respect to the manufacture of corn starch, corn gluten feed, and corn oil, with the understanding that the only raw material to be imported was sulphur. The corporation, in accepting the grant, was bound by these terms. The Court reasoned that if the imported article itself is not exempt from taxation, the foreign exchange used in its importation cannot logically be exempt from the exchange tax. On the authority of the Secretary of Finance to limit exemptions: The Court ruled that under Republic Act No. 901, the Secretary of Finance is expressly empowered to determine the scope and extent of the privileges granted under the tax exemption law. This authority includes the power to limit the articles that may be imported tax-free. The restriction on importing raw materials other than sulphur was made in compliance with the law's intent to boost local production and conserve foreign exchange. The Court distinguished this from the provisions of Republic Act No. 35, which did not grant such specific authority to the Secretary of Finance. On whether empty cotton bags constitute 'equipment': The Court disagreed with the contention that empty cotton bags fall under the category of 'equipment' as mentioned in Exemption No. 3 of the Secretary of Finance's letter. Defining 'equipment' as materials or articles used in equipping, furnishings, or apparatus necessary for the operation of the industry, the Court found that empty cotton bags used for packing finished products do not fit this definition. They are more akin to packaging materials rather than operational equipment. On the jurisdiction of the Court of Tax Appeals: The Court found no substance to the argument that the proceeding was beyond the jurisdiction of the CTA. It reiterated that the primary issue was the refund of taxes allegedly collected illegally, a matter within the CTA's purview. The Court cited previous decisions where it had inferentially upheld the CTA's jurisdiction in such cases. On the prescriptive period for refund claims: The Court affirmed the CTA's ruling that the two-year period for filing a suit for recovery of erroneously or illegally collected taxes is a prescriptive period, not a jurisdictional fact. This principle had been previously passed upon by the Supreme Court in other cases, confirming the CTA's correct application of the law on prescription.
Main Doctrine
The Secretary of Finance, under Republic Act No. 901, has the authority to determine the scope and extent of tax privileges granted to new and necessary industries, including the limitation of imported raw materials. Importations not covered by the specific grant of exemption are subject to applicable taxes.